In his 2019 Federal Budget, Treasurer Josh Frydenberg’s primary tax policies for small business were: (1) to increase and extend the instant asset write-off on asset purchases; and (2) to phase in a decrease in the business tax rate for small businesses.
Highlights of the changes
The Government has made two changes to the instant asset write-off rules.
The first is increasing the write-off threshold from $25,000 to $30,000. This means that for assets under $30,000 (such as a new vehicle) purchased before June 30, 2020, a small business can depreciate the full value of that asset in their tax books. By doing so, the small business brings forward the depreciation expenses claimable over the life of the asset and gets to claim them all in the year of purchase. As a result, all the tax benefits from depreciation expense are realised in the first year as opposed to being spread over the life of the asset.
The second change is to expand the application of the instant asset write-off to businesses with turnover up to $50 million (previously it was capped at $10 million). Medium-sized businesses will now get the same tax benefit as small businesses on asset purchases up to a cap of $30,000.
With respect to corporate tax, the Budget detailed a reduction to 25% by 2022 in tax rates for businesses with less than $50 million in turnover.
Read our small business cheat sheet on the Federal Budget to learn more.
Are the proposed policies positive for small business?
The short answer is yes.
The two proposed Budget changes to small business tax are aimed squarely at stimulating small business growth. The asset write-off policy combined with the reduction in tax rate, provide strong incentives for profitable, tax-paying small and medium business to invest further in their businesses. Stimulating small business investment in this way is a very effective way of boosting employment growth (both in terms of real wages and higher employment), so there are likely to be positive flow-on effects to the general economy from these policies.
Did the government go far enough with their small business tax policy?
Probably not, and here’s why:
1. The instant asset write-off policy is expected to cost $400 million over the forward estimates. This compares to a $158 billion cost for both personal and corporate tax cuts over the next 10 years. As Frydenberg mentioned in his comments on the Budget, “small business is the engine room of the economy”. This is because small businesses punch above their weight in terms of the impact they have on the economy and importantly the benefits from their growth is felt directly at the grassroots level in local communities (not in the headquarters of multinationals). So, in the context of the total size of the stimulus initiatives outlined in the Budget, the amount of stimulus specifically targeted towards small business looks small.
2. The stimulus is skewed towards profitable, tax-paying small businesses, but unfortunately many Australian small businesses and start-ups are either breakeven or loss-making. The instant asset-write off, as well as the reduction in tax rates, provides no benefit to a small business that is not making a profit. The Budget missed an opportunity to include further incentives that all small businesses could take advantage of, irrespective of whether they are profitable or not.
3. Access to capital for small businesses continues to be the biggest impediment to small business growth. We are hearing from customers, brokers and the market generally that Bank funding for small business continues to tighten. Lack of small business credit supply impacts the effectiveness of the instant asset write-off legislation (small businesses need to be able to finance the equipment to take advantage of the tax break!) but it is also a much broader issue. The $2 billion Australian Business Securitisation Fund bill did get passed in Parliament yesterday (4 April, 2019); this is good policy and it should help, at the margin. But, it is a small commitment (only $250 million in the first year) relative to the size of the problem.